Book value no more a tool to judge a company’s worth

MUMBAI: Book value of a share — a parameter used to determine if a company’s stock is fairly valued — seems to have lost its relevance with share prices soaring to dizzying heights even as book values have changed at a much sedate pace, or in many cases have not seen any improvement at all.

There are many companies where share prices are quoting at a hefty premium to the respective book values, which are still languishing in negative territory. Analysts caution this could be the result of unwarranted exuberance triggered by speculative interest. However, there are also examples where the share prices have rallied on account of, or in anticipation of a significant improvement, or smart turnaround in performance, and so a high price/book value ratio is justifiable, say analysts.

Book value per share is the net worth of the company (which is calculated by adding equity capital to reserves and surplus) divided by the number of outstanding equity shares.

“The high price-to-book value ratio is justifiable in case of manufacturing companies, which have an easy access to long term capital. But, it would be difficult for financial sector companies to sustain high ratio in the long run,” said Gagan Banga, director, Indiabulls Securities. While the ratio varies from sector to sector, companies from sectors like real estate have been enjoying abnormally high price/book value ratio, which is a matter of concern, he said.

After studying share price movement of listed companies, ET shortlisted over 150 companies with negative book values. GTC Industries, Kinetic Engineering, Mysore Cements, Tata Teleservices (Maharashtra), IFCI and LML are among notable companies forming part of the list. Few of these companies have now been making profits though they are yet to fully wipe off their accumulated losses.

For instance, GTC Industries recorded a net profit of Rs 7.6 crore in half-year ended September ‘06 and Rs 19.9 crore in the year ended March ‘06. The company, however, had negative reserves (excluding revaluation reserve) of Rs 84 crore as on the previous year-end. The scrip closed 1.5% lower at Rs 219.5 on Tuesday.

After posting losses continuously during the past several years, IFCI and Mysore Cements have turned the corner in the current year. The two companies posted net profit of Rs 100 crore and Rs 24 crore respectively during half-year ended September ‘06, while their stocks ended at Rs 13.3 and Rs 62 respectively on Tuesday. Others like Tata Teleservices, LML and Kinetic Engineering have been making losses for the past many years and are yet to come out of the red. The stocks are quoting at Rs 18, Rs 12 and Rs 123, respectively.

TCI Industries has seen an abnormal movement in its share price despite poor financials of the company. The scrip, in fact, has the highest price-to-book value ratio among the 150 shortlisted companies.

TCI recorded a loss of Rs 5.5 lakh on total income of Rs 33.5 lakh in half-year ended September ‘06. The company had incurred a loss of Rs 33 lakh on income of Rs 43 lakh during the last year. The scrip ended at Rs 988 on Tuesday, while it had touched a high of Rs 1,868 on July 4, ‘06.